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Analysts Think Bar Is Set Low For Sept Hike; MS Eyes 50bp Cut Potential

FED
  • Morgan Stanley looks at the possibility of a 50bp cut in … November: “The idea that FOMC participants discussed moving in July – even though they concluded it wasn't appropriate – raises the specter that they could also discuss the idea of cutting rates by 50bp in September – even if they conclude that it wouldn't be appropriate…investors may find it easier to assign a higher probability of a 50bp cut at the November meeting for two reasons: the November FOMC meeting concludes on November 7 – two days after the US general election on November 5; the November FOMC meeting also occurs after the October employment report on November 1; ISM manufacturing and services PMIs on November 1 and 5, respectively.”
  • BNP Paribas notes that it would take core CPI at 0.3% for 2 consecutive months to abandon a September rate cut: "The Committee likely needs to see a broad-based step-up in inflation (rather than a concentrated upside surprise) to lose the emerging confidence that inflation is moving sustainably back to 2%.The FOMC will have two more CPI reports and one more PCE report before September’s meeting. We think it would likely take two straight months of broad-based core CPI inflation at 0.3% to diminish the Committee's confidence enough to delay a September cut…We think upcoming employment reports are the key data that could promote a faster cutting cycle. Nonfarm payroll gains at 100k or lower or a layoff-driven increase in the unemployment rate closer to 4.5% could spur the Fed to making more than 50bp of cuts this year, in our view.”
  • Goldman Sachs largely agrees: "We continue to expect that the July inflation data will be favorable (we forecast 21bp for core CPI and 19bp for core PCE) and think that even acceptable news would likely clinch a September cut. After that, we expect the FOMC to cut every other meeting, or a once-per-quarter pace.
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